Government downgrading power market break-up plan

Government officials have indicated that proposals to localise electricity pricing are being downgraded in the wider reform of the power market, Utility Week has learned.

Deepa Venkateswaran, senior European equities analyst at asset manager AB Bernstein, told an Energy UK breakfast briefing yesterday (23 February) that BEIS (business, energy and industrial strategy) department civil servants had updated investors in late December about the next steps on its Review of Electricity Market Arrangements (REMA).

Investors were told that the government was preparing a new paper outlining its next steps on the initiative, which it consulted on during the summer of last year.

Venkateswaran said officials had signalled at the meeting that the REMA consultation paper’s more “radical options” on Local Marginal Pricing (LMP) were being given a lower priority. The other key element of REMA is the decoupling of the wholesale electricity and gas markets.

Under LMP, the wholesale price better reflects the costs of generating at different locations rather than the one-size-fits-all system that currently exists in Great Britain.

Advocates of the concept claim that it would encourage users to locate nearer to cheap sources of generation and therefore reduce the need for expensive transmission infrastructure.

However while LMP made sense when companies could choose where to locate their fossil fuel power plants, it was not so relevant for the needs of an energy system increasingly reliant on less locationally flexible renewable generation, Venkateswaran said: “It probably belongs to the old world where you wanted your CCGTs to be located near your customer base.

“It doesn’t really apply in this new zero carbon world where if Scotland’s got a lot of land and wind but not a lot of people, we should put the renewable plants there and not in central London where we can’t do it. It’s an outdated concept for the net zero energy system we’re building.”

She added that the “marginal” benefits of LMP are likely to be “illusory” and “not worth the trade-off” in terms of additional financing costs.

Tom Glover, UK country chair of RWE, said that while LMP is a popular concept amongst regulators, it is “never going to happen” in the UK.

He said his own work for RWE in Texas, where an LMP system operates, shows it had added 150 basis points onto the capital costs of a project the company had worked on.

These figures had been backed up by research that RWE had carried out with consultancy Frontier Economics, Glover said: “When we talk about 150 basis points on £100 million or £200 million of investment, suddenly the marginal benefits of LNT disappear.”

And he said LMP doesn’t incentivise the construction of new grid, which is the UK’s key energy infrastructure requirement.

More broadly, Glover warned that while RWE has allocated £15 billion of investment in UK projects, only a fifth of this sum has been committed in final investment decisions, meaning that the rest was potentially at risk of being diverted to other markets that the company operates in.

Pointing out that RWE has recently bought a business for $7 billion in the US, where the government has introduced a swathe of tax breaks to encourage investment in renewable energy, he said: “If that new US business wants some of that capital and it’s got better investments, it will go.

“We have a choice where to allocate capital and also where to allocate resource.”

While insisting that RWE remains committed to the UK, Glover said the US government’s Inflation Reduction Act and the European Commission’s energy initiatives means that “it’s starting to feel like Europe and the US are more attractive than the UK”.

Venkateswaran also raised concerns that energy investors could be encouraged to shift their focus to the US, where the radical electricity market reforms being contemplated in the European Union and the UK are not on the agenda.

She said: “We are competing with the US where there is no intention to interfere with any market design.

“If the UK doesn’t improve, we will definitely see capital move to the US.”

At a separate event, organised by the Policy Exchange thinktank on Tuesday, Conservative MP John Penrose urged the government to accelerate the REMA process by publishing a white paper “within weeks”.

“I don’t think we can be taking years bumbling along over REMA. You can probably come up with something which is pretty future proof in a matter of weeks or months.

“That’s the kind of speed that we need to achieve.”

The government has been contacted for comment.